Monday, December 29, 2014

A common mistake of first time founders is to try to do many tasks together as a small team that could be done just as quickly by having only one person take the lead. Given how small founding teams often are it is typically wise to split up and delegate tasks to keep things moving quickly. Otherwise building/selling a product may stall out as all founders are involved in all aspects of the company.

Examples where the entire team is usually not needed:Basic decisions. What sort of trash can should you buy? Or refrigerator? Although it is fun (and can be a great bonding event) to set up your office, do you really need to have your company come to a halt each time you add a new decoration? Assign a lead for a task and then have other people weigh in to make the decision if needed.

Your Seed Round.
Fundraises can be really exciting. You get to meet well known tech entrepreneurs and investors. You get to sit in the Sequoia offices and watch the slide projector display picture of Larry & Sergey and other Silicon Valley Legends they backed.

You also get to watch 2-3 months of your entire startups time evaporate.

For your seed fundraise, either your CEO, or your most articulate founder should drive it and be the primary person meeting investors. While smaller angels may write checks funding your company after a single meeting, larger investors may want to meet multiple time and ask for all sorts of follow ups. This can be incredibly time intensive and having a single founder drive the process will keep your team from freezing up for many months.

The CEO can meet with the investors the first 1-2 times. If the investor insists, you can have them meet the rest of the founding team as a one off. Or, choose one other founder for the investor to meet, and rotate founders so that you do not use too much of the rest of the team's time.

Partnership/customer conversation.
A big partner says they may want to work with you. It suddenly become an all hands on deck situation where you pull together the whole team to slog over to meet with a lowly middle manager. This is often not the best use of team time. Wait until an important meeting with multiple decision makers at the partner or customer before pulling in more then one person.

This also helps create an escalation path for a deal conversation. E.g. if the full founding team is not present you can "take the deal back to the founders" to make a decision. This stall time prevents on the spot decision making.

What about the other founders?
First time non-CEO co-founders (especially if they did not get the CEO gig, and they wanted it) may have a very strong Fear Of Missing Out (FOMO) or concerns about their own exposure and career. The question in their mind may be "What about me? What about my future career?" or "I want to meet important VCs. I want to be recognized as a key person on the team".

As the non-CEO founder, you will need to learn to manage your own needs and ego to make the company successful. Many early stage companies blow up due to co-founder conflicts. Many co-founder conflicts are driven by founders battling about external exposure (investors, press, partners etc.). As a founder, you will need to put the company first. If your company is hugely successful, it does not matter whether you had an extra coffee with a random second tier VC. All that will matter is that you were involved with a big success.

As the CEO-founder, you should be empathetic and aware that your co-founders have wants and needs around exposure. You should have an explicit conversation with co-founders who express these needs about how it may impact the company and the trade offs implied. If it is really important to the co-founders, you can try to create avenues for them to have some more limited exposure as long as it does not impact the company.

In general, all founders should keep in mind that there should be a separation of roles between founders (unless everyone is heads down coding). In general, startups have too much work rather then too little. Dividing and conquering is the only way to keep things moving.

Thursday, December 11, 2014

Fundraises tend to either have a lead investor, or be a party round. If you have a lead investor, they will negotiate and set the overall financing terms with you (valuation, round structure, etc.), put in the bulk of the money, and sometimes take a board seat.

Some lead investors also ask to have veto rights on who else can invest in your round. In general you should solicit their opinion, but not give them veto rights [1].

As an entrepreneur you only get to do a handful of fundraises, so VCs often have insights into which other investors to include (or exclude) and why. However, the lead investor may also have a number of conflicts in terms of who else they want to invest in your company that have nothing to do with increasing the value and success of your company[2].

These conflicts include:1. Blocking competitors.
Many funds view other funds as their competitors. Sometimes they want to block one another out of a company so that they keep the upside (or branding of a hot company) for themselves.

2. Favors.
Some investors trade favors. They will let someone invest in your round in exchange for a favor later. E.g. "If I let you invest in this hot company now, I expect you to let me invest in the next hot company you work on".

This horse trading usually does nothing good for the entrepreneur. It is simply currency for investors to gather and trade.

3. Voting blocks.
Sometimes a lead will bring in an investor who will always vote their way. E.g. I know one VC that pulls a large University endowment in as an investor in companies it is funding. This endowment always votes it shares the way the VC tells them too - increasing the %age of preferred the VC controls.

4. Ego.
Investors have different tiers. Sometimes the investors are focused on the brand value of the other investors versus how helpful they are to the company. E.g. "this other investor is beneath me, so they should not invest in the round I am leading".

As an entrepreneur, your primary selection criteria should be helpfulness & ethics of investor, not whether your lead investors views them as an equal.

5. Personal dislike.
Some investors just don't like each other. They may have insulted each other on Twitter or at some industry event and now don't want to work together.

As you can tell, none of the reasons above should impact your company. The focus in a fundraise should be on building the best possible investor team around your company.

Takeaway: Your lead investor should not have the right to block who else invests in your round. You want to consult them and get their feedback on the round, but also need to make your own decisions.

Notes
[1] The nice way to do this is to tell the lead investor that you value their input and feedback on other investors and you will be soliciting it along the way. However, it is ultimately up to the company to chose who the investors are. All of you are aligned on trying to get the best possible people around the company to help it and that is the focus of how you will close the fundraise.

[2] There are also lots of genuinely helpful reasons a lead may want to help shape the round. As investors in many other companies, they have grown to learn who is actually helpful versus not. Similarly, they may have seen other investors act in an actively destructive manner. So, your lead investor may have great input for you.

Wednesday, December 10, 2014

One of the most common critiques an entrepreneur will hear is that their business is not defensible. This was frequently stated about Google ("The switching cost is low - there are a dozen other search engines so you can just change web pages!"). Later, when I was at Google, a senior Google manager said the same thing to me about Facebook ("The switching cost is low! First there was Friendster, then Myspace, now Facebook. In 3 years everyone will be on something else!").

Many companies that appear to lack defensibility have strong lock in effects. Others start off without a lock in strategy, and have one emerge over time. Finally some businesses, such as marketplaces, inherently have lock-in due to their network effects. The key is to think through how you can create a moat for your business.

Approaches To Defensibility1. Scale Effects.
Scale gives you leverage when negotiating costs or special product features with suppliers or partners. For some companies (e.g. steel, oil and gas etc.) this scale allows the company to outcompete and outprice its peers in the market.

2. Network Effects.
Marketplaces (AirBnB, Uber/Lyft, Instacart), social networks (Facebook, Twitter, LinkedIn, Pinterest), and even YC all have different network effects that help to lock in customers/users. More on Uber/Lyft below.

3. IP.
Differentiated technology or technology leadership can lock in customers or customer cycles over time. Intel was always one step ahead of AMD processor-wise, while some healthcare companies use IP litigation to prevent other entrants in certain markets.

4. Distribution and Sales.
Locking in sales or distribution channels is a classic form of defensibility. Google gained searched market share in part via exclusive deals with Mozilla (back before Chrome became a dominant browser) and toolbar distribution deals. Traditional enterprise companies like Cisco and Oracle have strategically locked in reseller and services focused channels to push their product and lock out competitors.

5. Data.
Google's mapping dataset, and Yelps business listings + reviews provide defensive barriers for each company over time. Unique data can often help a business prevent its own commoditization.

6. Other.
There are a number of other ways to create lock-in. Branding is one way to differentiate a commoditized service and cause people to use you over and over, even if you offer a commodity product.

Uber and Lyft As Examples
Uber and Lyft are examples of companies that have baseline defensibility due to the network effects inherent in their driver/consumer liquidity. I.e. the more drivers they have, the more consumers want to use them and vice versa. Lock-in by these companies could actually go quite a bit farther with specific features and products:

Driver Side Lock In
There are numerous services Uber and Lyft could potentially provide drivers who drive from them frequently enough to try to differentiate against each other. Uber has already started some of these programs for things like car buying. However, one can image offering discounts or other services to drivers who spend more then 50% of their time driving for Uber or Lyft. If done quickly and correctly, this may create further lock-in for these services.

1. Bulk discounts (tires, gas, bodywork, etc.). Uber should now have enough heft to negotiate differentiated bulk deals for tires, gas, bodywork, and other car maintenance & operations costs for their drivers. These discounts could add up dramatically for a driver due to normal wear and tear while packing on the miles.

2. Driver insurance. Since Uber and Lyft have driver specific data, they should be able to help price insurance differentially for the best drivers, driving down costs for the driver.

3. Loans. Pay day or other short term loans based on past driver behavior/working hours. Pay day loans can be onerous to people who get them, and Uber/Lyft could help their drivers decrease borrowing costs due to transparency on future cash flows coming from working for these services.

Consumer Side Lock In
While consumers are ultimately going to make decisions based on driver availability and price, there are added services that may help get consumers to stick with the service more.1. Business services such as wifi. Adding something like Karma wifi to cars may be a way to generate additional revenue for both the driver, and Uber or Lyft, while enhancing the experience for business passengers. I know of a number of people who use Uber for long work-related drives.

2. Parental controls.
An increasing number of parents are using Uber or Lyft to deliver their kids to school, pick them up for afternoon activities and the like. The ability to pre-set locations (e.g. "my child can only go to school at 9am or I get an alarm", or schedules for kids ("pick up every afternoon at 3:00pm") could help lock in parents to the service.

For every business there will be a set of features that help create defensibility. The key is to think through what elements work best for your product, market, and business.